If you want to increase your investment returns, it can be helpful to study how investment professionals manage their money. We don't just look at their investments in their public filings, we look at how they approach investing as a discipline: their attitudes, philosophies, setbacks, and over years, even decades. You can also understand the wisdom learned through “management of money''.
Here are 9 ways the pros teach you to amp up your investing game.
How to invest like an expert
If you want to invest like the experts, the first step is to consider their approach. Here are nine things investment professionals are doing to improve returns.
1. Think long-term
In contrast to traders who seek to profit from relatively short-term trades, investors rarely think about what a stock will trade at next week. Investors are looking for companies that are well-positioned to compound their money over years or even decades. As long as the underlying business is on track, short-term stock price performance is largely irrelevant.
Thinking long-term has a number of important benefits, including forcing you to think like an owner, reducing capital gains taxes, and increasing your overall return. Imagine investing in a big long-term winner like Apple and making a 50% return after holding it for a while. While you can defer taxes on your wins, you'll be missing out on big profits over time.
In the words of the late investing legend Charlie Munger, “The first rule of compound interest: Don't interrupt it unnecessarily.”
2. “Don't lose your money”
“Don't lose money” is a maxim cited by super investor Warren Buffett as the number one rule of investing. (His second piece of advice: “Don't forget rule #1.”)
Naturally, no one goes into investing with the intention of losing money, but if you don't take the right approach, you can easily lose your shirt. But advice to “don't lose money” means focusing on what you can lose first: the potential downside of your investment. If the downside is low enough and the potential upside is high enough and likely to occur, it may be worth investing in.
Therefore, eliminating the biggest potential losers leaves more likely winners. Not all of your investments will be winners, but overall you're less likely to lose as much, and more of your money will compound over time, increasing your overall long-term returns. .
3. See what other investors are interested in
You don't get any points for originality in investing. The name of the game is to make money. This is a place where you can earn rewards by deceiving your neighbors, so be sure to check it out.
It might be worth tracking what great investors, including Warren Buffett via Berkshire Hathaway, are buying through Form 13F, which the SEC requires for investment funds with more than $100 million in assets. unknown. So you can easily find out what the experts are buying, even if you don't know why they're buying it. So to understand why professionals buy, explanations may be found in the quarterly letters that hedge funds and others send to individual investors.
Of course, it's a starting point, but it's not enough to just buy a stock because the pros like it.
4. Build an investment community
Big investor returns are a great place to find large-cap stocks, but you may find even more attractive small-cap stocks that big investors can't touch. That's why it can be helpful to have an investment community where you can not only share your ideas, but leverage your stock ideas.
Investing communities allow you to run with your ideas by other investors and see what they're thinking and where they're missing important details. Communities are also great for exploring a large stock of ideas faster than trying to figure out all the details yourself. You'll be able to sift through the market faster and see what others think are the most attractive ideas.
5. Focus on underperforming sectors, stocks, and asset classes
For expert value investors, one of the best sources of investment ideas is to find stocks, industries, asset classes, etc. that are unpopular today. If the undervaluation is likely to be corrected at some point in the future, it may be worth considering further.
For example, an expert might look for stocks that have hit 52-week lows or that have remained low for some time to assess whether the problem is temporary. If a company can overcome its problems, it has the potential to regain investor favor and generate above-average returns.
For asset classes, investors may focus on undervaluation compared to other asset classes. For example, in 2023, the Magnificent 7, made up of large-cap tech stocks, led the stock market rally, while small-cap stocks fell along the way. But by the second half of the year, large-cap stocks were worth multi-year highs relative to small-cap stocks, making them a relative bargain. So investors flocked to small-cap stocks, pulling blue-chip small-cap ETFs out of the selloff.
6. Do your own research
It is no exaggeration to say so much. When getting ideas from others, it's important to do your own research. While you can't trust what anonymous (or non-anonymous) individuals on the internet say about a company (which is one reason penny stocks are dangerous), check the facts and come to your own conclusion about whether a stock is an opportunity. must be lowered.
So, it's okay to get ideas from others, but do your own research before investing any money. Doing the work yourself also gives you the confidence to buy more later, especially if the stock price drops. If you know your business well, this may be the best time to choose a lower price.
Here's how to research stocks like a pro, including techniques to find important information that most investors miss.
7. Prepare your shopping list
Top investors are constantly learning about good companies they want to own at the right price. Even if they think the stock price is too high now, if the stock price goes down later, it could be a business they want to own. Professionals have a watch list of stocks and the prices they are willing to pay for them, so they are ready to jump on a good trade when the market goes down.
Having a shopping list means you can act quickly if the market overreacts to short-term news or if a bear market rears its head and you need to sift through the top items. You don't have to think when emotions are high and can act on the work you've already done.
8. Focus on your best ideas
Good investors typically focus their money on their top ideas, favoring, say, the 20th best idea whose risk-adjusted return may not be as high as the best. By focusing on the best ideas, experts can generate high returns on a given amount of capital.
Professionals are able to take focused positions because they think long-term (Rule #1), focus on the negatives first (Rule #2), and are confident in their research. Because (Rule #5). In other words, they can take the risk of a concentrated portfolio because they are doing the right job.
Finally, don't fall into the foolish trap of building a concentrated portfolio believing that it will make you an expert. That's how overconfident people tend to explode. For most investors, it is recommended to use diversification to reduce risk. For example, buying an S&P 500 index fund allows anyone to obtain a safer portfolio without the research work involved in owning individual stocks.
9. Invest in trends with ETFs
It takes a lot of effort to know enough to invest in an industry, but investors who want to ride big trends can buy sector ETFs and take advantage of its growth.
For example, the semiconductor industry may be difficult to understand, but the industry has provided excellent returns for many years. By purchasing a semiconductor ETF, you don't have to do the in-depth work of investing in individual companies and you don't have to pick winners. If anything, industry-wide growth is likely to further strengthen the portfolio.
However, it's important to understand what an ETF owns and whether it actually owns stocks that participate in the trends the fund claims to represent. For example, a blockchain ETF may own companies where only a small portion of their revenue comes from blockchain-related ventures and the rest from software, finance, or other industries.
conclusion
It's important to understand that copying the best practices and behaviors of experts can help increase your return on investment, but it takes time to practice. And as you progress, you'll discover techniques and tips that work best for you and your temperament.
Editorial Disclaimer: All investors are encouraged to conduct their own independent research on any investment strategy before making any investment decisions. Additionally, investors should note that past performance of an investment product does not guarantee future price appreciation.
